Guest Post by Chris MacIntosh
Why stagflation — and not inflation or deflation — will prevail as the dominant theme for the decade?
This period is analogous to the 1930-40 period with an exception. The countries going into this particular crisis are debt laden as we’re at the tail end of the long-term debt cycle. Not only that but the largest reserve currency economic blocks (US, Europe, UK, and Japan) are now moving into the contraction/restructuring stage of the cycle.
Consider where we are now. In every major economic bloc with a currency system that is used as reserves (most notably the US, UK, EU, and Japan) we have reached levels where growth has stalled. This growth stall was prior to the 2020 lockdowns, by the way. Debt had already begun to be unsustainable in so far as debt laden assets had reached insane levels with simultaneous levels of accompanying debt. The ROI provided was in many instances negative. Remember those negative yielding sovereign bonds in Europe? Remember loss making (high tech whizz bang “growth”) such as the ARK Innovation Fund.
The premise, of course, was that increasing levels of debt would continue to bring marginal real growth. We always said it was nonsense and now it’s proving to be. I guess we got lucky.
The issue is that the rise we saw in assets has been directly related to the rise in debt. Reducing one reduces the other and vice versa. Now we’re faced with real rates of inflation which are structural and cannot be “fixed” by tampering with fiscal or monetary policy since this time it is the public sector that is carrying the debt burden. Central banks are having to choose between inflation that grinds the economy down or “attacking inflation,” which will wipe out government spending by taking the piggy bank away. This is why central banks are about to become politicized. You just can’t have them acting in their own self interest where that threatens the government. That right there is a conflict, and I suspect it is going to be “resolved” within the next few years — one way or another.
If central banks raise rates sufficient to incentivize creditors to hold cash or debt instruments, they are simultaneously creating unmanageably high servicing costs for all those holding debt-based assets. Those holding those debt based assets will be forced to default because their ROI goes negative with higher carrying costs. There are two reasons why assets will be dumped in this environment:
- Servicing costs are too high to provide any acceptable ROI and
- The asset values themselves will be falling as market participants dump them (just look at bonds over the last 18 months).
The only way this doesn’t happen is if wage growth accelerates to keep up with those higher servicing costs, and in a stagflationary environment this never happens. Real wage growth is always lower than real inflation. This is why they have to lie about real inflation numbers.
As such the central banks are in the proverbial rock and hard place.
Here is where I believe Klaus and his gang of thieves intend to step in. They’ll print up a lot of money causing rapid inflation and Blackrock will buy up the assets. It will destroy the value of money right at a time when the broad market (middle class especially) is being forced to dump those assets in order to make ends meet and stave off bankruptcy and/or make ends meet. They may even throw in another pandemic or climate lockdowns — who knows. That’ll really seal the fate of the enslaved.
“You’ll own nothing and be happy” was never meant to be a choice.
This is all taking place rather rapidly now and problems are becoming insurmountable. Consider these indebted governments who have to keep funding operations. This funding requires issuing debt. A lot of debt. In the US, for example, they’re selling debt equivalent to 5% of GDP. That’s fine at a different part of the cycle, when interest rates are falling and growth is accelerating. Neither of these things are taking place today. And that means that the appetite for this debt will fall short, pushing down bond prices and sending yields higher. You see, bond investors have two problems to consider now. They’re waking to what we’ve been saying was coming — an environment of persistently higher interest rates.
Why buy a bond today when you believe it’s going to be cheaper tomorrow? And why buy a bond today which fails to compensate you for the annual rate of inflation (currency devaluation)?
For governments this turns from a problem into a collapse rather quickly (though the rest of the world is likely to get it before the US). Their costs of borrowing rise and their currencies debase.
In the private sector the availability of credit will contract, which means less purchase of goods and services. Basically a stagnant shitty economy, coupled with a loss of purchasing power via inflation/currency debasement.
Oh, and I’ve not mentioned taxes.
They’re going up because the pointy shoes who got us into this mess will NEVER self reflect or reduce their own living standards/cutting the size of government.
So what to do?
Well, this is where we look at the service sector economy and the “stuff” or raw materials component of the economy. It is worth noting that no matter how fancy your hair dryer is or how many settings it has, it doesn’t work without being plugged into the wall, which is to say plugged into an electrical grid run on fossil fuels. Take away the fossil fuels or indeed the components required to build, maintain and operate the electrical grid (copper, steel, etc.) and the hair dryer is as useful as a politician. Not so much.
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I have always respected Chris and his sound approach to investing but I fear he is missing the underlying and fundamental reason that economic growth actually stalled around 2000 when EROEI went negative. This was when the ‘pointy shoes’ as he says, went into print mode, drove speculation through the roof, and created the 2008/9 GFC.
The response to this global crisis was QE which moved the financial economy further away from the real economy which is now collapsing, aided and abetted by WEF et al who have made it worse, so as to crater currencies and move to a virtual, centralised global CBDC model.
Chris says: “I suspect it is going to be “resolved” within the next few years — one way or another.” Yes, it will be resolved by moving living standards down to around the 18th century for the 99% with a continuing global depression. Many essayists confirm this paradigm, Tim Morgan, Gail Tverberg and this short video explains it further:
I have explained all this in my book and subsequent articles: https://austrianpeter.substack.com/p/the-financial-jigsaw-part-2-the-end?s=w and what we can do to Protect our assets and Survive the coming Great Depression II in Part 2 of my book as I write during next year.
I distrust any spiel that says “fossil fuels”. Petroleum is abiotic.
Well lc- it is an hypothesis but lacks testable evidence unless you have other information. Coal and its formation by compression or organic material over millions of years seems to indicate that oil is merely an extension of this. I can’t believe that coal and peat is abiotic. OTOH – coal is found near the surface and rarely that deep, certainly not as deep as oil; thus if oil were biotic then it wouldn’t be found so deep down in the earth. I think this is a powerful argument.
Furthermore, methane is almost certainly abiotic as indicated by this scientific article:
https://phys.org/news/2019-04-rewriting-textbook-fossil-fuels-technologies.html
It is logical to project that if methane is abiotic then it is reasonable that most hydrocarbons could also be abiotic. I hope that further research unlocks a real theory which would alter our perception of future energy deposits. Thus in future I promise to speak of ‘hydrocarbons’ as opposed to ‘fossil fuels’ which I agree is misleading.
Many thanks for pointing this out. https://www.sciencedaily.com/releases/2008/01/080131111653.htm
Did you fall for the fairy-tale that EROEI will only get worse, maybe based on the fracking example, but straight-line extrapolated to a global scale?
But Dr Tim Morgan makes sense to me ‘m’ – where do you think his thesis is incorrect? It would help me to get to the honest answer as an amateur. You seem to have good info.
Technology long surpassed “the end of oil” Peter, they just need to roll out the alternatives. Oil is so 20th century.
I’m not convinced of the energy density of the alternatives BL – I don’t see an equivalent to diesel?
Try a back-of-a-napkin calculation:
– Lookup how much [crude] oil does the world use, per year
– convert that into cubic kilometers
– assume a “sponge-like” factor to get to how much retrievable oil field volume would hold that crude oil amount (I’d go with 0.2, so 5 times your previous result)
Now you’ve got what you need, per year, for oil supply.
– Lookup the land surface area of the Earth
– substract glacier-covered and mountains over 2000 m covered area, and add the shallow coastal areas with less than 200 m water depth
– now you’ve got the drillable surface area in square kilometers.
– multiply by average maximum depth (Sachalin-I has drilled 40,000ft / 12km deep); I’d go with 7 km.
Now you’ve got the available Earth crust volume to look into, for what you need.
Now make a wild guess how much of that [overall accessible Earth crust volume] has been seriously geologically surveyed.
Now tell me again with a straight face you or anybody else can make serious forecasts about when we run out of oil, or any other major resource.
All agreed ‘m’ your figures are indisputable. But our point is not the available reserves, which I would guess are almost limitless, but the economics of the price/supply/demand in order to maintain our current standard of living, at least in the developed world, which is a dissipative system. I would welcome your critique of this proposition (bit of a drag, one hour exposition if you have the time):
If it hasn’t been found yet, you can make zero statements about its EROEI. And geological surveys are not very energy-intensive.
If our current standard of living, at least in the developed [Western] world, collapses, it will be for lack of morals and not lack of resources.
I just skimmed the chapter titles of the video. Anybody who spends 1 hour as speaker on jiggling the facts but carefully avoids [at least when looking at the chapter titles] asking -and hopefully trying to answer- why the Club of Rome was wrong in 1972, I cannot take seriously on this. (If he does speak more than in passing about it, point me to the rough timestamp.)
It’s start at 45 ‘m’ – the ‘real economy’ versus the ‘financial economy’ which is the same argument that Tim Morgan and Gail Tverberg use in their discourses. But I do agree that the fundamental issue is the total collapse of morality, integrity and honesty especially in our leaders and their Bankster puppeteers.
The Club of Rome made no (known to me) statement about financial things – it clearly stated hard physical limits will cause mass starvation in large parts of the world within the 1980s. Hand-waving that they were just 40/50/60/70 years early is not sufficient; they need to explain why CoR was wrong, and how those mistakes were avoided in their current doom forecasts.
And then the speaker seems to swallows the Globull Warming bullschiff hook, line, and sinker. OK, case closed.
“…especially in our leaders and their Bankster puppeteers”
Unfortunately, I now believe that to be a false assessment.
‘The line between good and evil runs through the heart of every human.’ And each of us carries part of the responsibility of letting it have come so far (as well as it will get worse.)
I think these examples does put the case you make into context.
https://www.aei.org/carpe-diem/50-years-of-failed-doomsday-eco-pocalyptic-predictions-the-so-called-experts-are-0-50/
Well, if 20% plus inflation is stagflation, I was poorly educated.
High inflation rate is part of a stagflationary environment: “Stagflation is an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation” – https://www.investopedia.com/terms/s/stagflation.asp
it presents a particularly difficult problem for policy makers; to help solve slow growth and high unemployment, policy makers want to reduce interest rates but reducing interest rates exacerbates inflation.
You should read your own copy/pasted statement one more time.
First sentence is copied from Investopedia.com with attribution. I don’t see anything wrong with it myself. Second sentence I wrote, not copy/pasted. Not sure what is wrong with it? Open to being corrected …
a high unemployment rate accompanied by inflation
is not the same as
an unemployment rate accompanied by high inflation
nor
a high unemployment rate accompanied by high inflation
nor (soon)
a high unemployment rate accompanied by hyperinflation
OK, although what you write is, of course, true in principle and it is important to use words correctly, agreed.
However, one can also consider that in the 70s the US experienced some of the highest inflation rates in the past 60 years, hitting double digit in ’74 and ’79 – https://www.macrotrends.net/countries/USA/united-states/inflation-rate-cpi
The 70s also saw a period of persistent stagflation; “Stagflation in the 1970s combined high inflation with disappointingly uneven economic growth.” – https://www.investopedia.com/articles/economics/08/1970-stagflation.asp
Are we debating the definition of the word “high” in respect to inflation and thus at what level low becomes moderate becomes high becomes hyper? Not being an economist myself I think the essence of the post was that stagflationary periods are defined by slow growth + unemployment + inflation (and high inflation according to Investopedia)
To get into a detailed discussion on the specific definition of the words is too much work for this thread – the links provided offer those who are interested ample avenues for further exploration into the topic by people presumably far better educated in economics then myself.
Now try that inflation comparison of the late 70’s to today again, with inflation numbers calculated by unchanged methodology: http://www.shadowstats.com -> Alternate Data -> Inflation -> ‘1980-Based Alternate’
No, we are debating that “accompanied by inflation” cannot semantically be reinterpreted into “any level of inflation; maybe even including negative one [deflation]” without sliding off into BS territory.
If you take the Shadowstats numbers and subtract the official inflation numbers, the difference needs to be subtracted from the official GDP “increases” – which means we had no or slightly negative GDP growth since 2001, with the housing bubble peak as very brief artificial exception.
Which means the US has been in Stagflation since at least 2001, and since 2020 has now moved on to something beyond stagflation.
(Which is in line with how it felt/feels, to me and any not self-deluding observer out of the low or middle class.)
My prior post seems to have disappeared so I re-post here:
What you say is, of course, in principle true; we need to use words correctly. I agree.
However, one can consider that the 70s saw some of the highest rates of inflation in the US in the past 60+ years, including double digit in ‘74 and ‘79 – https://www.macrotrends.net/countries/USA/united-states/inflation-rate-cpi
“The 1970s saw some of the highest rates of inflation in the United States in recent history.” – https://www.investopedia.com/articles/economics/09/1970s-great-inflation.asp
The 70s also saw a period of persistent stagflation; “Stagflation in the 1970s combined high inflation with disappointingly uneven economic growth.” – https://www.investopedia.com/articles/economics/08/1970-stagflation.asp
Are we debating the definition of the word “high” as it relates to inflation? Must we first define the levels when inflation moves from low to moderate to high to hyper? This would become all too much work for this simple thread.
The essence of my post was that stagflation combines slow growth + unemployment + inflation and I provided links for any interested reader to explore the topic further. I am not an economist but the links discuss stagflation and are written by people who presumably are more educated in economics than I am.
My previous post attempt seems to have failed so I re-post here:
What you say is, of course, in principle true; we need to use words correctly. I agree.
However, one can consider that the 70s saw some of the highest rates of inflation in the US in the past 60+ years, including double digit in ‘74 and ‘79 – https://www.macrotrends.net/countries/USA/united-states/inflation-rate-cpi
“The 1970s saw some of the highest rates of inflation in the United States in recent history.” – https://www.investopedia.com/articles/economics/09/1970s-great-inflation.asp
The 70s also saw a period of persistent stagflation; “Stagflation in the 1970s combined high inflation with disappointingly uneven economic growth.” – https://www.investopedia.com/articles/economics/08/1970-stagflation.asp
Are we debating the definition of the word “high” as it relates to inflation? Must we first define the levels when inflation moves from low to moderate to high to hyper? This would become all too much work for this simple thread.
The essence of my post was that stagflation combines slow growth + unemployment + inflation and I provided links for any interested reader to explore the topic further. I am not an economist but the links discuss stagflation and are written by people who presumably are more educated in economics than I am.
I take Complete Economic Collapse for $1000, Alex.
Japan has been spinning the wheel in this game for 30 years.
Good luck to you with the assumption that the US can also do it for 30 years without collapse.
“Here is where I believe Klaus and his gang of thieves intend to step in. They’ll print up a lot of money causing rapid inflation and Blackrock will buy up the assets. It will destroy the value of money right at a time when the broad market (middle class especially) is being forced to dump those assets in order to make ends meet and stave off bankruptcy and/or make ends meet. They may even throw in another pandemic or climate lockdowns — who knows. That’ll really seal the fate of the enslaved.”
I think this is one part of multiple parts to clear areas to buy out – the dems are following a plan and allowing cities to be crime ridden and overrun with homeless also brings down prices and causes flight form these areas – and then BlackRock and the like buy up these areas for far cheaper than could have otherwise
Cannot build back better till everyone is run off, they raze and rebuild. The Great Reset
Perfect, thank you Plutoh – you have summarised it nicely. A carbon copy of the 1930s. First economic depression, assets devalued, the Elites step in, buying for cents on the dollar – bingo – off we go again. Except this time the economics don’t work.